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This is the third article in a continuing series that
examines the state of the ecosystem necessary to successfully
bring technology to market. Based on dozens of interviews with
entrepreneurs, venture capitalists, angel investors,
business leaders, academics, tech-transfer experts and
policy makers, this series looks at what is working and what can
be improved in te go-to-market ecosystem in the United States,
Canada and Britain. We invite your feedback.

These long-term trends have left early-stage companies in a tight
spot. They must become increasingly creative to shorten time to
market, become more capital efficient and generally figure out
how to do more with less. The cash-burn of years past is no
longer an option, if it ever was.

Rise of the super angels

All is not bleak, however. While traditional VCs may have become
easily spooked by the prospect of sinking cash into an unproven
startup, many angel organizations have stepped up to fill the
void. Ronald Weissman, chair of the Software Special Industry
Group at one of Silicon Valley’s oldest angel
organization, Band of Angels, said many angel
organizations have come to act like early-stage VCs.

However, this also means that angel funding may come with more
strings attached than in the past.

“They want proof points and market validation,” Weissman said.
“They want to see the strength of your management team and your
pipeline.”

What is interesting about this trend is that a robust angel
industry has traditionally been the prerequisite of a sustainable
VC industry, said Denzil Doyle, chairman of
Ottawa’s Doyletech Corp. According to Doyle,
supporting a strong angel community is fundamental to growing a
healthy and sustainable VC industry in any country, a point that
is particularly relevant to Canada.

But the importance of fostering a strong angel eco-system extends
far beyond Canada. In its May 2010 report, “Government
Involvement in the VC Industry, International Comparisons,”
the CVCA cited studies in both the U.S. and the
U.K. that emphasize the importance of angels, and not just as
investors.

Because let's make one point clear right now: If angels are
banding together and stepping up to fill a VC gap, it is not due
to a surplus of cash they are simply looking to shovel out the
door. They are themselves investors who are struggling with low
returns and uncertain outcomes. However, they recognize the
importance of keeping the innovation pipeline full with new
companies and new ideas. They just have the advantage of having
their own money to invest, unlike VCs who must account for how
they have invested other people’s money.

What angels provide to startup entrepreneurs in addition to
capital is experience, credibility, contacts and connections that
improve the flow of high-quality firms available to the VC
sector.

However, as Jeff Campbell, serial entrepreneur
and CEO of Waterloo’s PerspecSys, points out, the
emergence of angels to fill the early-stage funding gap is not
without risks.

Diamonds in the rough may not be afforded sufficient runway
and resources to become polished gems, Campbell
said, due to earlier exits at lower dollar values as angels
look to recoup their investment. For Canadian firms in
particular, this can often result in sales to U.S. acquirers and
the loss of what could have been the country’s next Research in
Motion or Cognos.

There is no ‘normal’

To what extent this is true is open to debate. (Please, debate
it; the “Comment” section is just a little to the south of this
post.) What’s important is that, when cash is tight and the
runway is short, the onus is on startups to get their act
together fast.

According to Iain Klugman, president and
CEO of Communitech, “The new normal is there is no
normal.” Startups must mitigate existing gaps in their
go-to-market strategies by casting as wide a net as possible to
identify the resources they need for success, from securing
federal grants and tax credits to plugging into organizations
that provide networking opportunities and mentorship.

“Now the capitalization of a company can be a whole combination
of different resources and sources of funding,” Klugman said. “A
lot of people think the old normal still exists, but only for a
small group of companies.”

For Anthony Lee, a general partner
at Altos Ventures and co-founder of the
C100, the “new normal” is creating a new generation of quick and
nimble startups.

“A lot of companies are coming to us for a ‘Series A’ financing
with already a million users for a product,” he said.

However, the need for a startup to become more aggressive with
early customer engagement and market validation to shorten its
time to market is only half of the story. The other is that this
process has also become easier for many startups in recent years.

The power of the new normal

Social and new media channels have collapsed traditional
enterprise sales models. The rise of cloud computing, open source
and commoditized development platforms have made it far easier to
bring a software service or product to market compared to 10 or
even five years ago.

“Those companies that are
founded today are often able to compete with the ones founded
five years ago with a lot fewer dollars and a lot more agility,”
said John Stokes, managing partner
of Montreal Start Up. “The tech market has
evolved much more quickly than the venture market.”

Even for hardware plays, greater capital efficiencies can now be
found thanks to fire sales of equipment and intellectual property
by companies claimed by the downturn, the outsourcing of low-cost
components, and the shifting partition between hardware and
software that reduces development and manufacturing costs.

But all these advantages will pay off only if the startup is
focused on the right starting point – that potential customer it
hopes will ultimately buy the product or service it wants to
develop.

“Great companies constantly test the market, for validation and
feedback,” said Weissman “When I look at a new company, I ask
where did the product come from? Did it come as a result of a
market demand?”

Early market engagement is vital and with the rise of Web 2.0 and
new media channels, it has become easier than ever. It is vital
to ensuring a product or service in development is responding to
a clear market need with the features, functionality and price
points that will drive market uptake and allow it to be
competitive. And it is the best defense against a shortage of
available risk capital.

In our next installment, we will explore how to find exploitable
technology and the market engagement that is required to
determine if it is in fact worth exploiting.